The tradeoff between risk and return in portfolio investments is that with an increase in risk, returns are expected to rise and vice versa (Investopedia, 2017).

• Purpose

The purpose of the report is to analyze the risk and return for the Market Index and the two traded shares, namely News Media Ltd and HR Resources Ltd, using the data provided in the case problem.

Statistics

To assess the risk and return of the two shares and market index, the following key statistics were analyzed and interpreted as follows:-

• Monthly Returns

The monthly returns are the gains or losses received from the stock. It is calculated as current monthly price divided by previous monthly price less one. Table 2-1 shows the monthly returns for the index, News Media, HR Resources and a 50:50 portfolio.

Table 2-1 Monthly Returns

Mean (expected) Return and Standard Deviation

The expected return is calculated as the average of the monthly returns. We observe that HR resources had the highest expected returns (2.08%), followed by News Media (0.83%), then the market index (0.66%)

The standard deviation is a measure of risk. A high standard deviation implies a greater the portfolio’s risk. We observe that HR resources had the highest standard deviation (4.47%), followed by News Media (4.14%) then the market index (1.53%). These values are consistent with the risk return trade off i.e. since HR Resources has the highest risk, then we expect the highest return.

Table 2-2 Statistics

The Coefficient of Variation (CV)

The standard deviation cannot be used to compare investments unless they have the same expected return. Thus we can determine the coefficient of variation which factors the mean (This Matter, 2017). We observe that News Media had the highest CV (5.02), followed by HR Resources (2.15) then the market index (2.33). In this case, the investment with the second smallest returns (News Media) has the greatest risk.

• The Correlation Coefficient between News Media and HR Resources Ltd.

The Correlation Coefficient measures the relationship between two shares. The correlation coefficient between News Media and HR Resources is -0.4678 suggesting the shares are negatively correlated and move in different directions.

• The Standard Deviation of Returns for a Portfolio

We observe for a portfolio mix of 50% invested in HR Resources and 50% invested in News Media, the standard deviation is 2.23% (see table 2-5). This is significantly lower than the standard deviations of the individual asset i.e. 4.47% and 4.14%, implying that investing in a portfolio of different investments will reduce the level of risk.

 Table 2-5 Statistics- Portfolio

Beta Coefficient

Beta is a measure of volatility in relation to the market. It measures the risk that cannot be reduced from diversification. The Beta coefficient for both News Media and HR Resources Ltd is -1.35 and 2.66 respectively. Thus, News Media is less volatile than the market and HR Resources is more volatile than the market. 

Table 2-6 Betas

Summary

In conclusion, we observe that the higher the risk, the higher the expected return. In this scenario, HR Resources was more risky than the market and News Media and as expected had the highest returns. An investor can reduce risk through diversification.

References

Investopedia, 2017. Risk Return Tradeoff. [Online]  Available at: https://www.investopedia.com

This Matter, 2017. Single Asset Risk: Standard Deviation and Coefficient of Variation. [Online]  Available at: https://thismatter.com/money/investments/single-asset-risk.htm